The ASOS share price (LON:ASC) jumped by as much as 27% in the past month after its most recent Q3 update. With profits slowly creeping back up, now could be the time to stock up on ASOS shares while they’re incredibly cheap.
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The past year has been a painful one for investors in ASOS shares. The once-pandemic favourite has seen the cost-of-living crisis hit its business hard, causing sales to flatline while profits drop like a stone along with the ASOS share price.
This hasn’t been helped by its turnaround plan either, as the retailer continues to offload its bloated inventory at highly discounted prices. This has subsequently cut thick into ASOS’ bottom line, which has seen its profits drop from £150m to -£236m. Consequently, the company recently run into cash troubles and has had to raise capital via equity to keep its finances afloat.
Nonetheless, sentiment surrounding ASOS shares has improved lately. Upon a successful raising of capital, the FTSE constituent reported a relatively positive set of numbers in its latest Q3 update. Despite seeing an 11% decline in sales, there were a number of encouraging points which investors appreciated, sending the ASOS share price rocketing:
- Adjusted EBIT was £20m higher than last year;
- Profit per order rose 30%;
- FY23 guidance for adjusted EBIT was left unchanged at £40m to £60m.
The board is also projecting the firm to grow its adjusted sales by low double-digits by the end of the year. But more importantly, CEO José Antonio Ramos Calamonte now expects ASOS to generate ‘material cash generation’ in FY24, helped in part by the £200m of cost savings so far this year, with another £300m to come. As such, Calamonte now anticipates a further reduction in net debt, which should serve as a positive indicator for the ASOS share price.
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Are ASOS shares the bargain they seem to be?
Judging by the upbeat trading update, it’s certainly encouraging to see ASOS’ turnaround plan beginning to take shape. Provided its Driving Change initiative continues to bear fruit, one could argue that the current ASOS share price presents a bargain. After all, ASOS shares are currently trading with a forward P/S ratio of just 0.1.
While ASOS shares could head to the moon, potential investors should also proceed with an element of caution. For one, there’s still plenty of work that needs to be done to downsize its inventory levels. What’s more, management still needs to deal with other factors such as the platform’s declining active customer base, which fell by another 800k in Q3.
Nonetheless, this could be the first step of a remarkable comeback, as ASOS shares have seen their short interest fall from a high of 9.5% last October to just 1.2% today. This should help the ASOS share price navigate through some short-term volatility. Plus, the group’s recent £80m equity raise and new £275m long-term loan facility should provide some resilience and flexibility for its financials in the near term.
That said, the group could still get taken over by Mike Ashley’s Fraser Group, especially after the conglomerate raised its stake in recent weeks. Although this could end up benefitting new investors, those who bought in when the ASOS share price was much higher could fail to see the full turnaround materialise, thereby cutting short the comeback story. It doesn’t help that founder Nicholas Robertson recently sold c.£1m worth of ASOS shares either.
Having said that, it would be foolish to rule out a staggering rise for the ASOS share price in the months to come, as the enterprise’s headwinds begin to dissipate. Falling inflation should ease pressures on households which should encourage more spending — and that’s been evident in the latest results from peers NEXT, ABF, and H&M. As such, ASOS shares may be worth taking a risk on with a small position given their tremendous upside potential.
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Please note: Share tips are not personal recommendations or advice and should never be treated as such.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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